Zhixin Securities issued a research report stating that the recent banking sector has continued to perform well, with funds continuously favoring state-owned large banks, and the industry index reached a new high for the year last week; there was a pullback on Friday, and the market is highly concerned about the trend of subsequent market. The second quarter is expected to have stable bank business prosperity, cautious expansion strategies, and interest rate spreads that follow the expected trend, with a stable credit risk pattern. In terms of sector investment, the multi-party policies launched earlier have helped improve bank risk expectations, and the bank stock valuation is more supported by fundamentals, further consolidating the certainty of dividend income space. Regarding individual stocks, two main lines are recommended: 1) steady bottoming, with products with high dividends and small valuation fluctuations in large banks having more configuration value under product logic; 2) growth attack: under the growth logic, companies with sustained alpha have more room for valuation improvement.
The main points of the Citic Securities research report are as follows:
Second-quarter sector performance outlook: stable business prosperity.
1) Scale: Expansion strategy remains cautious. The year-on-year growth rate of social financing dropped from 8.7% (1Q24) to 8.4% in May, and bank asset investment follows the trend of financial data. Ban on manual interest rate supplementation and credit demand impose constraints on investment.
2) Pricing: Expected stability of interest rate spreads. In February 2024, the 5-year LPR was lowered by 25 basis points. Although loan repricing is continuing, regulatory supervision of manual interest rate supplementation favors cost savings of liabilities and an expected month-over-month decrease of 1-2bps in interest rate spreads.
3) Risks: No deterioration is expected in the generation of new non-performing situations. For public sectors, there were no large subject increases in risk in key areas (real estate/municipal investment) in the first half of the year; for retail sectors, as of May 2024, annualized default rates for consumer loans/credit cards/mortgage ABS slightly increased at a high level; for overall public and retail sectors, overall stability is expected in the generation of new non-performing situations.
Overall, it is expected that the revenue and profit growth rate in the first half of the year will not change significantly from the first-quarter data, and business prosperity will remain stable.
Review of market performance since June: The dividend attribute of the sector continues to be interpreted, and funds continue to favor state-owned large banks.
1) The sector's price and volume performance is good. This week's bank (Zhixin) index trend was relatively stable, and it hit a new high for the year during the week, breaking through the position of the end of May. Since July, the daily average turnover of the bank (Zhixin) index has increased by 8.5% to 19.75 billion yuan, and the turnover activity level has remained high.
2) Southbound funds have significantly increased their holdings of state-owned large banks, while northbound funds' holdings have become more differentiated. Since June, Southbound funds have increased their holdings of Hong Kong-listed bank stocks by more than 5.5 billion shares, and the proportion of Southbound funds' holdings has increased by 0.8 percentage points to 11.2%. Among them, Bank of China / China Construction Bank / ICBC increased their holdings by 1.98 billion shares / 1.47 billion shares / 1.37 billion shares, accounting for a total of 86%, and the trend of high stock dividend diffusion to the Hong Kong bank sector is obvious. As of July 5th, the Northbound funds' holdings of bank stocks have decreased by 0.13 billion shares from the beginning of June, and the proportion of holdings has decreased slightly by 0.1 percentage points to 2.3%; among them, the four major state-owned banks have all increased their holdings, and China Construction Bank / ICBC have both increased their shareholdings by more than 0.1 billion shares.
How to view the sector investment space? Behind the market style is the result of the re-balancing of risk-reward ratios of financial products under the current economic expectations.
Under the main background of low-risk financial products being the incremental wealth AUM, the source of funds for configuring bank stocks is relatively certain. Currently, the dividend yield (2023) of the bank (Zhixin) index is around 5.3%. If the dividend yield decreases from the current level to about 4%, the corresponding valuation increase space exceeds 25%, and the PB valuation is restored to around 0.8x. Therefore, the configuration of bank stocks still needs fundamental support. Bank stock valuations are much lower than 1x PB, implying that investors' debt risk expectations are much higher than actual financial report data. Therefore, the restoration of debt risk expectations is far more powerful than performance growth in promoting valuation improvements, and the valuation improvement has a fundamental basis.
Investment strategy:
Macro-economic growth rate has fallen sharply; bank asset quality has deteriorated beyond expectations; regulatory and industry policies have unexpectedly changed; regional economic prosperity has declined; and each company's development strategy execution has fallen short of expectations.